Although Newmont Mining (NYSE: NEM) is apparently more optimistic about the price of gold than the world's largest gold miner, it's worried enough about its own future cash flows that the industry's No. 2 player is putting its dividend policy under review.
Newmont released its 2013 production results the other day and also provided guidance for the coming year, noting that because of the export tax the government of Indonesia has imposed on miners it may cut back operations there unless the matter is resolved in the next few months. Like fellow miner Freeport-McMoRan (NYSE: FCX), which operates the massive Grasberg mine in Indonesia, Newmont was given a pass on processing ore in-country until more infrastructure is in place to handle its output. The two of them account for 97% of Indonesia's copper exports.
Although the government was trying to boost domestic processing facilities, there aren't enough smelters to handle existing production and building new facilities to process some metals is simply not economically viable. It's estimated that to build a 1 million tonne per year alumina refinery would require the ore fetch a price well more than $400 per tonne to justify the cost of the smelter that would run around $1.5 billion to build. Alumina, though, goes for just $325 to $350 per tonne today. Indonesia accounts for about 12% of the world's bauxite ore, which is used to make alumina.
Even as the miners were given a reprieve until 2017, the government surprised everyone by imposing a 20% to 25% tax on their unprocessed exports, with the rate increasing to as high as 60% by 2016. Both Newmont and Freeport say the tax is illegal because their existing contracts with Indonesia prohibit the imposition of new taxes. They've indicated they're willing to take legal action through international arbitration if they can't settle the dispute amicably, but Freeport has already said it will defer production because of the situation.
That, of course, could also threaten Newmont's dividend, which is tied to the price of gold. This past week Barrick Gold (NYSE: ABX) recalculated its reserves assuming gold at $1,100 per ounce, well below the $1,500-per-ounce level it used last year, but is one ratings agency Moody's has endorsed (global financial institution Credit Suisse estimates gold could hit $1,000 per ounce). Newmont, however, set its reserve pricing at $1,300 per ounce, down only $100 from last year's $1,400 per ounce price, but it's using a $1,400 level for resource assumptions (down from $1,600 in 2013).
The miner justifies the higher rate because it says $1,100 per ounce is just not sustainable. Although for planning purposes it actually uses a $1,200 price, if it saw gold tumbling below that threshold for a sustained period it has backup plans for its growth capital expenditures. Even so, at the levels it's using, it still necessitates a review of its dividend policy, which it will update this month when it reports earnings. Newmont cut its dividend 18% last year as the price of gold fell, and we saw a number of miners slash their payout, including Barrick, which hacked it down by 75%, and Newcrest Mining, which suspended it altogether.
Although Newmont's notes weren't all bad, with gold production last year of 5.1 million ounces coming in at the top end of its guidance, the outlook for 2014 was below what Wall Street had been anticipating and shares of the miner tumbled 10% on Friday as a result. I actually believe Newmont's gold pricing plans are more realistic than those used by Barrick and Moody's let alone the floor set by Credit Suisse.
China's slowing economy, the turmoil in emerging markets, the unrest that's causing in the stock market, and the house of cards central bankers have created with their monetary policy points to gold going much higher than where it stands today. Because Newmont Mining was so beaten down last year, I continue to be optimistic it will be one of the shining stars of 2014.
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